Delfi (formerly: Petra Foods)

The company apparently does not hedge the Rupiah.
I wonder why it takes the currency risk in its stride.

Delfi has been in Indonesia for many decades. Its 50% Indonesia chocolate market share is the result of decade upon decade of branding and marketing efforts. Delfi's brands of chocolate, namely Silverqueen, TOPS and Ceres, have a very strong mind share of Indonesia consumers. These brands are the chocolates that Indonesians have been eating since childhood. They are everywhere. Warungs (mama shop), minimarts, supermarkets, petrol kiosks, even small kids paddle these chocolates to car drivers and pedestrians who stop at red lights of a busy cross junction.

Delfi products are always strategically well displayed on the chocolate shelf of any minimarts in Indonesia. Its is common to see Delfi products displayed promimently at eye level while Kits Kats, Crunch, Rocher, at bottom of shelf. When you go back home and switch on the TV, their ads are there again, slowly but surely, creeping into your mind. As I said earlier, these branding efforts have been taking place consistently for decades. For Sg equivalents, think, Milo, Ribena, Brands chicken essence, Gardenia, Yakult. For Indonesian consumers, the brand equity of Silverqueen, TOPS and Ceres, is as powerful as the popular Sg brands I have mentioned.

How do I know these? Because my wife was born in Medan and has spent her childhood there. She is a Sg citizen now btw. We visit Indonesia once a year. If you visit Indonesia a few times, you will appreciate how Delfi, a small fry compared to the global players (Nestle, Mondelez, MARS, Ferrero, Hershey), has truly punched well above its weight. Commanding a 50% market share in any food sector is no small feat. Delfi must has constructed some form of economic moats to achieve this.

How did Delfi manage to fend off competitors for decades? What are its competitive advantages? Maybe its due to their pricing strategy, largely made possible by using palm oil as cocoa butter substitute. Maybe its due to its extensive distribution network and supply chain. Maybe its due to decades of branding and marketing efforts. Maybe its due to deep local knowledge. Watever the reasons, one have to credit Delfi's management for stirring the ship in the right direction. 50% earnings dividend payout policy. Zero long term debt, strong balance sheet. Solid free cashflow. Acquiring Van Houten. Implementation of SAP system last year. All these point to a competent, responsible, forward looking management, yah? Honest management too, no hanky panky one, considering Davinder Singh is one of their directors. Just kidding! Haha!

The issue of IDR fluctuation is well known. However, this problem also applies to its competitors, be it local or global players. The rising middle class of Indonesia bodes well for Delfi. With population of 260 million and growing, an eye-watering 50% market share must whet the appetite of most investors.

Just sharing what I know. I do not own Delfi shares at time of writing.

(28-04-2020, 09:22 PM)Shiyi Wrote: The company apparently does not hedge the Rupiah.
I wonder why it takes the currency risk in its stride.

You are also taking risk if you hedge.  Your hedge may expire worthless.

(29-04-2020, 06:08 AM)BlackCat Wrote:

(28-04-2020, 09:22 PM)Shiyi Wrote: The company apparently does not hedge the Rupiah.
I wonder why it takes the currency risk in its stride.

You are also taking risk if you hedge.  Your hedge may expire worthless.

Actually, what kind of hedging are we talking about? The mismatch between financial reporting currency (USD) and its revenue (IDR, peso etc)?

Just taking a look at the annual report, the company does have some FX contracts for its USD exposure and it also buys cocoa (main ingredient) on a forward looking 20 months ahead.

Generally, a company does some sort of hedging if there is a big difference between the topline (how it generates its revenue) and bottomline (how it costs to generate the revenue), and also taking into account the turnover duration from signing the contract to realizable sale. For example, in their hey days, Sembcorp Marine and Keppel Corp take up rig contracts denominated in USD and the main cost for rigs are steel (also in USD), so there isn't much mismatch there. But there is ~1.5-3 years gap between contract to delivery and so while there is some inflation built into their contract, they do hedge a portion of their FX risk due to the duration difference. Another example would be SIA, the company has huge mismatches between its topline (various currencies) and bottomline (largely fuel prices denominated in USD or buying planes from Boeing), as a result, it has currency hedges for its FX exposure (USD) and also fuel hedging for its largest expenditure.

So from what I observe, companies mainly hedge more for business needs, rather than for financial reporting purposes. I mean it is not wrong to do the latter but it sounds like more financial engineering to focus too much on the latter, rather than focusing on the business.

That said, as investors, we do have to take care of the currency risk when we invest because there can be a mismatch between the way we generate our profits (equity prices and dividends) vs the way the companies generate their profits. Food Empire would be a good poster child.

The weakness of IDR is, in simple terms, a matter of too much IDR flowing out of the country.

There are many reasons for that, but most of it is related to long-running issues of corruption and political instability. The present situation is better than before, but local business owners have not shed their fear and distrust of the regional and federal authorities.

There is a reason why houses in certain enclaves of Jakarta are characterised by high walls with barbed wire, huge metal gates, and even security posts. And it is the same reason why they bank and seek medical treatment in Singapore.

If more of their monies are retained in the country's banking system, and spent/invested locally, there will probably be more development and lower currency depreciation.

But long-running business families don't stay rich without constantly looking over their shoulders. If you have reservations about investing in a company with poor management record, the business elites of Indonesia probably feel the same way about their country's political elites.

So there's still a lot of work for Indonesian administrators.

===

But its challenging to get everyone behind a common goal because the power bases are so divided among different interest groups. The formation of the Indonesian state is itself an unnatural construct of bringing together the islands of Sumatra, Java, a large part of Kalimantan, Sulawesi, and Papua, after the second world war. The civil wars in Timor Leste and Aceh, and the subsequent granting of their independence and autonomous status, respectively, is what happens when you put people of different loyalties under a single and unfamiliar banner.

Politically, there are the conservative muslims, the less conservative muslims, different factions of the military, and different factions of the old-time noble/aristocrats/politicians. Everyone wants the country made in their own image, and a piece of the action. So what you get instead, in the formation of a parliament of varied interests, is a whole lot of compromises and (horse) trading.

Democracies may not always be good for the country. And dictatorships may not always be bad.

===

Given the general long-term bearishness of the IDR, it will be expensive to hedge its depreciation against USD; if you don't want it, and others don't want it, who is going to want it? Long-term currency hedges are usually not practical for businesses, unless the rates are stable or cheap.

The best policy for companies like Delfi is probably to buy USD whenever their IDR working capital needs are satisfied.

Yet, if all foreign-owned companies are doing this, that's going to cause a lot of pressure on IDR.

This self-feeding vicious cycle can only be broken by convincing the currency market of IDR's long-term stability, which again rests on the market's perception/assessment of government action and policies.

===

@jfc18 That's a very nice description. The quantitative parameters of Delfi's business and financial strength are well noted. And what you have written is probably what attracted a number of funds to bid its share price to more than 20x p/e valuations, in the past. Valuations are certainly cheaper now, even though nothing fundamentally -- apart from the coivd situation -- has changed.

@ksir The cost of lowering price to compete is not much for the giants, given their resources. Any gain from competition may be small relative to their size, but their goal isn't always profit maximisation. In fact, Mars has been the most successful globally in terms of sales, because of their penchant and discipline for keeping both returns and margins very low; not by allowing inefficiency, but by ensuring that selling price is extremely competitive. Being privately and family held, it has no pressure to raise profits/dividends.

I acknowledge that such discussions of competition could seem abstract or tenuous. But if the investor's intended time horizon is long, the only way an investor can feel safe from the vicissitudes of the markets through the duration is by ascertaining that the company/business will be safe from most forms of danger.

For those interested in the history, rivalry, cross of paths, and the eventual different trajectory of Mars and Hershey:

https://www.goodreads.com/book/show/7161...EJx&rank=1

(29-04-2020, 04:10 AM)jfc18 Wrote: Delfi has been in Indonesia for many decades. Its 50% Indonesia chocolate market share is the result of decade upon decade of branding and marketing efforts. Delfi's brands of chocolate, namely Silverqueen, TOPS and Ceres, have a very strong mind share of Indonesia consumers. These brands are the chocolates that Indonesians have been eating since childhood. They are everywhere. Warungs (mama shop), minimarts, supermarkets, petrol kiosks, even small kids paddle these chocolates to car drivers and pedestrians who stop at red lights of a busy cross junction.

Delfi products are always strategically well displayed on the chocolate shelf of any minimarts in Indonesia. Its is common to see Delfi products displayed promimently at eye level while Kits Kats, Crunch, Rocher, at bottom of shelf. When you go back home and switch on the TV, their ads are there again, slowly but surely, creeping into your mind. As I said earlier, these branding efforts have been taking place consistently for decades. For Sg equivalents, think, Milo, Ribena, Brands chicken essence, Gardenia, Yakult. For Indonesian consumers, the brand equity of Silverqueen, TOPS and Ceres, is as powerful as the popular Sg brands I have mentioned.

How do I know these? Because my wife was born in Medan and has spent her childhood there. She is a Sg citizen now btw. We visit Indonesia once a year. If you visit Indonesia a few times, you will appreciate how Delfi, a small fry compared to the global players (Nestle, Mondelez, MARS, Ferrero, Hershey), has truly punched well above its weight. Commanding a 50% market share in any food sector is no small feat. Delfi must has constructed some form of economic moats to achieve this.

How did Delfi manage to fend off competitors for decades? What are its competitive advantages? Maybe its due to their pricing strategy, largely made possible by using palm oil as cocoa butter substitute. Maybe its due to its extensive distribution network and supply chain. Maybe its due to decades of branding and marketing efforts. Maybe its due to deep local knowledge. Watever the reasons, one have to credit Delfi's management for stirring the ship in the right direction. 50% earnings dividend payout policy. Zero long term debt, strong balance sheet. Solid free cashflow. Acquiring Van Houten. Implementation of SAP system last year. All these point to a competent, responsible, forward looking management, yah? Honest management too, no hanky panky one, considering Davinder Singh is one of their directors. Just kidding! Haha!

The issue of IDR fluctuation is well known. However, this problem also applies to its competitors, be it local or global players. The rising middle class of Indonesia bodes well for Delfi. With population of 260 million and growing, an eye-watering 50% market share must whet the appetite of most investors.

Just sharing what I know. I do not own Delfi shares at time of writing.

jfc18,

Personally, I enjoyed your quality sharing above and it makes much sense.

Besides branding and distribution, I would like to share another aspect of Delfi's moat: taste.
If one has eaten Silverqueen or TOPS, he would know that the taste is starkly different from international chocolates. I have tried; Delfi's chocolate taste weird and much less sweet compared to international brands. My guess is, Delfi has been in the Indon market for decades and the Indons are accustomed to this kind of taste than those of international chocolates. This is similar to most Chongqing and Chengdu people disliking Singapore's sweet and "spicy" chilli crabs, and most Caucasians' take on MaLa Hotpot. 

So, things are not as simple as throwing capital will work wonders, else international brands would have long dominated the market share. On the flip side, this is also why Delfi is finding it very very challenging to grow market share outside of its dominant markets. I remember I used to see Silverqueen and TOPS easily in NTUC (10 years ago), but it is not widely available nowadays. Looks like Delfi more or less withdrew from Singapore's market due to a lack of success.

Then the next question comes, why can't international brands create a chocolate to cater to the local's taste? And why can't Delfi localise to grow outside of it's dominant markets. I have yet to thought of an answer to this. Would be thankful if someone can share their thoughts.

Without looking deep, I think the weakness in the IDR could be affecting Delfi's share price (18% decline in IDR vs USD, that's a lot!). There is currency risk for the company, as well as currency risk for non-Indon investors. Part of the reason could be what Karlmarx suggested: capital flight (similar to China). As I mentioned before in the Hexindo Adiperkasa thread, political situation alone is not the entire picture.

Another reason could be the capital structure of the economy. It is no coincidence that the IDR is one of the worst performing currency in Asia in 2020. From what I understand, a lot of Indon corporate debts are denominated in USD. When the worldwide lockdown begun, and the March crash, there is a sudden halt in most companies' cashflow and a worldwide shortage of USD. Indon businessman have to sell their IDR to buy USD to repay their USD debts and pay for their business inputs. The strength of the dollar coupled with huge USD-denominated Indon corporate debt have led to the huge relative underperformance of the IDR. That is why the Fed has to conduct currency swap lines with Bank Indonesia, to ensure sufficient USD liquidity and the USD reserve currency status. USD:IDR in Feb was 13600, and it spiked all the way up to early Mar at 16600. Lost 18% in relative value (similar for SGD:IDR). After the currency swap lines was announced, USD:IDR declined and stabilised at 15500. I don't think this is a coincidence.

As there are many moving parts to macro. Would be thankful if someone can share additional thoughts regarding IDR depreciation.

(29-04-2020, 10:38 PM)holymage Wrote: Besides branding and distribution, I would like to share another aspect of Delfi's moat: taste.
If one has eaten Silverqueen or TOPS, he would know that the taste is starkly different from international chocolates. I have tried; Delfi's chocolate taste weird and much less sweet compared to international brands. My guess is, Delfi has been in the Indon market for decades and the Indons are accustomed to this kind of taste than those of international chocolates. This is similar to most Chongqing and Chengdu people disliking Singapore's sweet and "spicy" chilli crabs, and most Caucasians' take on MaLa Hotpot. 

There could be a function of recipe but I recall the main reason is they use palm oil

(29-04-2020, 01:27 PM)karlmarx Wrote: The weakness of IDR is, in simple terms, a matter of too much IDR flowing out of the country.

I think you meant USD flowing out of the country. IDR is also a controlled currency where hedging by non Indon firms is by using NDF

Most people wants to hold SGD or USD if possible because like you say it's a vicous circle when people don't have faith that it is a store of value.

This counter is starting to look interesting fundamentally.

The period of US dollar strength is now behind us (which is the topic of all the posts above). The risks to this counter are now:
- I think we are entering a period of commodity inflation. Milk, Sugar, Cocoa make up a large proportion of COGS.
- Their receivables have been going up over the years.

Annoying that SGX no longer mandates quarterly reporting.

Delfi would probably get a better valuation if it listed in its own country.

Edit: And if it were not family controlled, I'm sure one of the Big Four would snap it up in a minute at current prices.

1H Result as at 30 Jun 2020
Rev USD211m (vs 240m)
GP  USD 76m (vs  86m)
NP  USD 10m (vs  15m)
Div SGD 1.76cts (vs 1.73cts)

Since the relaxation of some of these measures, there is increased consumer mobility and we are already seeing signs of recovery in June, although not yet back to pre-COVID 19 levels. Clearly the evolution of the COVID-19 pandemic in the countries in which we operate will have a significant bearing on our future operations and performance. However, given the continued volatility and uncertainty from the COVID-19 pandemic, it is too early to project what our full year results might be.

During 1H 2020, we invested significantly to reduce the risk to our people and our business from the pandemic. Going forward, we will continue to monitor the situation and prioritise our resources, including financial resources, on tacking further challenges brought about by the COVID-19 pandemic. 

Stay home and stay healthy, valuebuddies.

Delfi 9M as at 30 Sept 2020
Rev USD305m (vs 352m)
GPM  35% (vs 35%)

How the COVID pandemic unfolds from here makes it hard to assess future performance. However, barring unforeseen circumstances, we believe it is possible that the momentum from 3Q will continue into the 4th quarter although given the continued volatility and uncertainty, it is too early to assess whether it will be back to the pre-COVID levels.

Recent news of vaccines having been developed is bringing some cheer but until these vaccines are available globally, we expect the macroeconomic and operating environments in our regional markets to remain challenging. Under this New Normal, we still see growth in our business albeit at a slower rate in the short term.
https://links.sgx.com/FileOpen/Update%20...eID=639670

Stay home and stay safe, everyone.